China Just Handed Trump A Really Good Reason To Retaliate

Saturday, Miao Wei, the head of the powerful Ministry of Industry and Information Technology, tried to reassure the international community that Beijing’s Made in China 2025 plan will not discriminate against foreign companies. Minister Miao was responding to sharp criticisms contained in a report issued Tuesday by the European Union Chamber of Commerce in China.

Last month, Beijing issued implementing guidelines for the plan. The guidelines were the product of more than 20 State Council units led by Miao’s ministry.

Every nation tries to help its domestic businesses, but China’s plan, introduced in March 2015 by Premier Li Keqiang, steps over the line in aiding Chinese companies.

The plan, sometimes abbreviated to CM2025, is a $300 billion initiative to make China nearly self-sufficient in 10 industries, including aircraft, robots, electric cars, and computer chips. Beijing has set out specific targets for market shares by industry.

The plan aims for near self-sufficiency in components by 2020 and materials five years later.

In short, Beijing wants Chinese industries to possess 80% of China’s home market in the targeted sectors.

To get there, CM2025 calls for jumbo-sized, low-interest loans from state investment funds and development banks, aid for the purchase of foreign competitors, and research subsidies.

As the European Union Chamber of Commerce in China noted in its report, “the 2025 project is in fact a large-scale import substitution plan aimed at nationalizing key industries, or at least severely curtailing the position of foreign business in them, both as suppliers of key components and finished goods.”

A German think tank, the Mercator Institute for China Studies, put it this way: Beijing is planning to build a “small vanguard” of “front-runners” that “are likely to dominate their sectors on the Chinese market and become fierce competitors in international markets.”

The U.S. Chamber of Commerce is expected to issue a report along the same lines shortly.

It is in this context that Miao mounted Beijing’s defense. He made many points Saturday but stumbled when trying to defend the plan’s targets for market share of Chinese brands. They were only forecasts, the minister maintained. As he said, “When we were drawing up the plan, we did not deliberately pursue these targets.”

Miao’s comment was not credible. The plan is a compilation of tactics Beijing has used in the past to disadvantage foreign companies. It comes in the midst of a concerted effort to cripple foreign competitors in China. And does he really think Beijing is going to spend tens of billions of dollars over the course of years to aid foreigners?

Beijing has had great success with its various industrial policies, but this plan is unlikely to succeed, and not only because its targets are “lofty,” as Sara Hsu of the State University of New York at New Paltz described them on this site.

First, CM2025 is afflicted by the same flaw that undermines all politically directed efforts. Governments are not good at picking winners and losers in broad-based, multi-year initiatives.

Yes, Beijing has had success with a few enterprises, the most notable being the nominally private Huawei Technologies. To replicate that favorable result across ten industries, however, is extremely unlikely, beyond the capabilities of any government.

China’s officials in 2025 may be able to point to some dominate Chinese companies in the ten sectors, but they will have no good answer to this question, posed by Professor Hsu: “Is this program better than allowing foreign companies to compete, forcing Chinese companies to innovate?”

A state-dominated system almost always opts for state-led solutions. Chinese leaders may say they are in favor of globalization, as Xi Jinping famously did at Davos this year, but they implement localist solutions whenever possible.

This is not to say localism cannot work, especially in the short run. Mao Zedong, after all, had a booming economy in the first years of his rule.

Yet those types of solutions do not produce good results over time. The Chinese economy under Mao collapsed less than a decade after he assumed power. The economy today may be on the same course. China, after the relative openness of the “reform and opening up” period started by Deng Xiaoping, appears to be regressing fast, moving toward more state control and turning inward under Mao-admiring Xi Jinping. Mao admirers, among other things, make poor economic planners.

Second, Xi’s predatory policies, theoretically, would make sense in the long run if foreigners cooperated by not protesting trade violations, easily surrendering technology, continually pouring in money for no return.

But they are no longer doing that. Last year, foreign direct investment into China fell in dollar terms. And it will continue to fall as China’s growth slows, as Beijing imposes stricter controls on outbound transfers, as Xi continues to target foreign companies in China.

China’s economy needs infusions of cash and technology, and his CM2025 plan will restrict the flow as foreign companies decide to invest elsewhere. As the European Union Chamber of Commerce in China report notes, the discrimination inherent in Made in China 2025 limits the ability of foreign business “to contribute to the country’s innovation ecosystem.”

Third, countries will protect themselves from China’s new industrial plan. Whatever one may think of CM2025, this is a particularly bad time to have to defend it.

As the Financial Timesreports, Peter Navarro, the head of the newly created National Trade Council, and senior adviser Steve Bannon are beginning to win “a civil war” in the White House over trade policy.

If they can keep President Trump’s ear, the U.S. will act decisively against Beijing’s increasingly brazen protectionism. After all, Navarro, in his address before the National Association for Business Economics this month, said trade deficits are a matter of national security and identified China as responsible for about half of America’s.

Navarro has a point. Among the American companies that are thought to be at special risk because of CM2025 are Boeing, General Electric, and Intel.

Trump was elected to protect Boeing, General Electric, and Intel—and their American-based workers—from Chinese trade practices. Minister Miao has just handed him a reason to hit China hard.